A new era at the Federal Reserve

Change is often met with uneasiness and anxiety, which are natural responses to uncertainty. With all the news events happening now — from a mid-term election and wars across the globe to conversations about the artificial intelligence revolution — another change is underway: a new Federal Reserve chair and the potential impact on the bond and stock markets. Now that he has been confirmed by the Senate, Kevin Warsh will step into a role closely watched by world and business leaders.

Warsh has had a very accomplished career. He earned his bachelor’s degree from Stanford University and his law degree from Harvard University, was the Shepard Family Distinguished Visiting Fellow in Economics at the Hoover Institution and lectured at the Stanford Graduate School of Business. Warsh served on the White House National Economic Council under President George W. Bush. In 2006, he was appointed to the Board of Governors of the Federal Reserve System, where he served through 2011. In addition to his academic and government experience, he also worked on mergers and acquisitions at Morgan Stanley. To say the least, he has extensive credentials to serve as Fed chair.

Warsh has been relatively hawkish on interest rates in the past. He has criticized previous Fed boards for keeping interest rates too loose for too long and criticized protectionism in an essay he wrote along with former Florida Gov. Jeb Bush in 2011. With all this said, the biggest question is what direction the board will take under Warsh’s leadership.

As Fed chair, Warsh must deal with several unique issues over the next several months.

1. President Donald Trump has made it very clear that he wants interest rates to be lowered. This raises the question of whether the Fed will bow to pressure from the president and allow him to influence Fed policy. Warsh stated in his confirmation hearing that the Fed will maintain its independence from the executive branch in setting monetary policy.
2. Former Fed Chairman Jerome Powell has remained as a Fed governor and participated in the initial meetings. How long Powell stays on the board and how much influence he continues to have with the other Fed governors will be closely watched by investors and policymakers alike.
3. The months-long conflict with Iran has increased inflationary pressures and added another layer of uncertainty in the global energy markets and infrastructure. How much of an increase in short-term inflation will the Fed tolerate before hiking interest rates?
4. The Fed formally adopted its 2% inflation target in 2012 under Chairman Ben Bernanke. Before that, the Fed operated without a formal inflation target. Will new leadership reconsider this target? Since 1913, the historical average inflation rate in the United States has hovered around 3.1% to 3.3%.
5. Unemployment has softened since 2022, while the AI revolution continues to reshape the workplace through increased efficiency and automation. Will the Fed move to lower interest rates to keep unemployment at low levels? Since 1948, the historical average unemployment rate has been around 5.7%.

What will the Fed do next? All these factors create uncertainty for investors, businesses and policymakers. Warsh has criticized the Fed’s past communication practices, particularly the use of the dot plot, and early signaling around future interest rate decisions. He argues the Fed has overcommunicated in recent years, which could result in fewer press conferences, projections and speeches, and less forward guidance under his leadership. Warsh advocates genuine debate among board members rather than a consensus-driven approach. As a result, the path forward for markets is less predictable.

What will Warsh do about interest rates?

Due to uncertainty about future policy decisions, rigorous debate among Fed officials could lead to more split decisions on interest rate policy. Although policy dissents are infrequent —with 462 dissents in Federal Open Market Committee meetings from 1936 to 2013 — they do occur. The Fed may become less reliant on data, instead feeling its way through the economy and using more qualitative measures. This could result in lowering interest rates at one meeting and raising them at the next. For example, the Fed may raise rates by 0.25 bps in the second half of the year and then lower them by 0.25 bps in early 2027. Consumers, and by extension markets, dislike unpredictability and change. How should we respond?

Unpredictability is not necessarily bad if you can stick to your game plan. With a less chatty Fed, we may see more short-term headline volatility. If you can ride the volatility roller coaster and stick to your investment plan, all of this will be white noise to you. However, if you are nearing retirement or prefer to avoid significant fluctuations in account value, you may want to consider strategies designed to help mitigate market volatility. Some potential options include:

• A laddering strategy to help reduce exposure to short-term market volatility and interest rate changes.
• A diversified portfolio that includes mutual funds with lower downside capture ratios.
• Dollar-cost averaging strategies for individuals beginning to invest in the market, helping to reduce the emotional impact of market timing decisions.
• Annuities with volatility triggers, buffers and floors that may help provide downside protection and reduce emotional decision-making during periods of market stress.
• Income-focused annuity strategies for retirees looking for a steady income to help cover their most important expenses in retirement.

While these strategies are nothing new, they can be attractive during periods of uncertainty and market change.  As investors, we do not like change or loss; however, having a disciplined financial plan in place can help create consistency and provide confidence during changing market environments.

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